patrick.net

Justme,

In response to your earlier question: Yes, my personal investment returns are without any IPO windfalls or one-time big deals.

My returns do vary dramatically over time, with some years bringing 50% to 100% returns, and others a loss of 5% to 10%. I make my money by betting big (with lots of leverage) when I think the economy will do well. And I duck for cover to minimize my losses when I expect trouble.

My main investment vehicle is real estate (which is why I lose money in some years). I also invest in stocks.

I only invest long – no shorting, and no puts or calls. When I expect declines I sell to pay off debt and go to cash or bonds (as I did for the entire 2000 to 2003 stock market decline). After a decline I jump in heavily using leverage (as I did with stocks in early March of 2003, and real estate during 1998 through 2003).

My current asset allocation is 38% cash, 36% real estate, and 26% stock. With very little debt, I am poised and waiting for another buying opportunity.

I play the cycles, getting in and out. You know, classic market timing – which any good investment advisor will tell you can’t be done. Well, they are wrong about that.

Most people (and the market in general) tend to be too superficial in their analysis and oblivious to changes until they finally over-react to them. This causes volatility that is a great opportunity for the informed investor who can calmly exploit this condition to achieve above average returns.

As Rudyard Kipling said (roughly): “If you can keep your head when all about you are losing theirs… …yours is the earth and all that’s in it…

If you felt screwed as a saver, don't feel bad. You have been promoted. You will now be screwed as a tax payer as well !

http://biz.yahoo.com/ap/070919/paulson_mortgages.html

As has been pointed out this is worse than the rate cut. Not only the USD is tanking now, but the bond market is going to be suspicious about FNMA issued securities as well. This cannot be good for the housing market. The more they try to help, the more they mess it up.

But let's come to the point. This is not designed to help homeowners and FBs. This will only allow Paulson's former employer to unload some junk during the temporary-yeah-right phase.

You have to admire their talent. Neither Bernanke nor Paulson are fools. They are doing their job perfectly. Only people who call them idiots are those who do not understand what that job is.

And as Warren Buffet said (roughly): "Be fearful when others are greedy, and greedy when others are fearful."

Some further comment on the Fed Funds target rate:

The Fed cut their target rate because they have finally become more concerned about the economy than inflation. They now realize that the shit is about to hit the fan!

More than a year ago I predicted that the economy was headed for a near recession starting in late 2007. I expect the economy to be at its worst (but mild doldrums) in the first half of 2008.

Given the recent economic conditions, the Fed Funds target rate is punitive to the economy at anything above 4.0%. And it is neutral to the economy at 3.75-4.0%. So, after almost two years of being above that range (including about 15 months at 5.25%) we have no likely escape. A recession or near recession is almost a sure thing at this point.

The Fed can’t stop it now – they waited too long. It takes about nine months for a change in monetary policy to begin to have a measurable effect on the economy. And the recession or near recession is knocking at the door! They are now playing damage control, and they are behind the curve (just as I expected they would be).

I don’t make the economic rules, I just use them to anticipate the markets and make money.

If we were in a continuing natural and neutral state of market conditions (without the previous bubble right behind us) the normal interest rate profile would include: Fed Funds at 4.0%, 2 yr Treasury at 4.25%, and 10 yr Treasury at about 5.0%. This is my target for the fabled “reversion to the mean” that people talk about.

OO:

That's interesting about the CPI and valuation of gold. I tried doing that too but I don't trust the CPI.

So instead I used census data for the median annual wages of all working Americans, which they had annual data for, then figured out how much labor would be required to purchase an ounce. By that measure gold is a little bit above the median right now.

Zephyr :

Fed Funds at 4.0%, 2 yr Treasury at 4.25%, and 10 yr Treasury at about 5.0%

That seems entirely reasonable. I wouldn't be surprised if the rates are cut all the way to 3.5, in half point stops.

So why are you not moving your cash into stocks ? Eventually the recession would end. In spite of the rally yesterday, there is enough fear adn worry in the market. The panic buying is not even started. I think we will have more dips in coming months to accumulate for long term. But I am not waiting for them. I am going long on technology. And I will keep buying at every dip.

Reserve Bank of India is having a hard time preventing the appreciation of Indian Rupee.

http://tinyurl.com/yqhjwv

OO,
I think we will see a moderate rise of inflation on a worldwide basis in the years ahead. We have already obtained the bulk of the deflationary benefit that can come from bringing the previously sequestered communist labor into the world economy.

Zephy, I think you are full of it, to put it politely. No one makes 26%/yr return over 20+ years. If you did, you would have turned 1k into 1/3M in that time. No one does that well, not even Warren Buffet.

StuckinBA,

I sold a bunch of stock in June and July, and then started to buy again in late August on the dip. During September I sat tight as the market rose on anticipation of the rate cut. I was hoping the Fed would disappoint the market - causing a sell-off for me to buy into. Now I am thinking this is a sucker's rally on the exuberance of the rate cut. I expect the economy to falter, and stocks should slip with it - for a while. However, I do expect stocks to pick up before the economy looks good. So I will be buying again before long. I am also keeping money ready to buy real estate bargains at the bottom - a more sure thing, and a better return on equity in the long run.

sybrib,

I used official CPI as an evaluation tool because I want to be conservative. We all know that CPI is understated, if you use the real inflation rate over the years, gold adjusted for 1974 or 1980 price will be even cheaper.

I don't think median salary is the right measure, because throughout history, gold has always been a hedge for the richer class. Only rich people have enough left-over savings and need hedge to preserve their purchasing power. The poor just live from hand to mouth. Also, gold shouldn't be used by someone without much savings as a hedging tool because it generates no interest income but incurs storage cost. If you insist on using income, you should use the income of the top 20% who can comfortably afford some yellow metal sleeping in the garage doing nothing for years.

Zephyr,

I don't think we will see moderate inflation. Moderate inflation is reserved for strong currencies. I think we will see very high inflation, but not hyperinflation because we still have superior military power.

There is of course no point arguing over which scenario will materialize, only time will tell. We just lay our bets.

Zephyr Says:
Do you really think that China will be immune to cycles? ...with all their over-investment, rampant corruption and other market inefficiencies, when they do get their inevitable cyclical decline, it will be a big one. In fact, with their existing internal stress and demographics the unemployment from a downturn is potentially a political regime changing event, and a time of risk for war. BTW, China is the #3 manufacturing economy of the world. Japan is #2, and #1 is the good old US of A.

I think it will be more immune to cycles as a centralised command economy with a massive export base and fewer 'free market' features. For that reason regime change is also relatively unlikely, due to the repressive nature of the govt. Regarding the prospect of war, who would they start a war with, and why? Unless it was in competition for the remaining oil resources of the planet, or other commodities. We are talking the shape of things to come in several decades time, when the world will probably be a dramatically different place in terms of resource usage.

Many analysts I know suggest that China will be THE superpower in the world inside of 10 years. I can't speak for US or Japanese manufacturing bases, given the sheer size of the Chinese export market as a proportion of production, and price competitiveness. Japan increasingly manufactures in Chinese factories these days. The US seems to bully any countries which are becoming ascendant in manufacturing on price, such as Japan and China, by insisting they revalue their currency or similar. I don't know what threats are made behind closed doors, but it would either be import tariffs, boycotts, cancellation of treaties, or threat of use of military force.

euro just broke 1.4

DS,

China will NOT become the next superpower within 10 years, I can assure you that. This is a country that I am intimately familiar with, and I can bet all I have against such a possibility. 70 years, I am not sure. But not in 10 years.

Australia's strength is not to sell to China alone. By being the quarry of the world, Oz should cater to as many customers as possible, be it China, Japan or India. If China fails, someone else will rise to fill the void. You don't need to bet the farm on one country.

True inflation = CPI x 2 + 2%, in my book...

since the days they started tweaking it in earnest...

Jimbo,

Believe what you want. My statements are truthful. And my returns are not as unusual as you seem to think. Take a look at some of the better than average companies in the US for reference.

Most of my money has come from real estate. In fact, my returns are not unusual for experienced real estate investors who use a lot of leverage, as I do. Keep in mind that my gains are only taxed at disposition, and only at capital gains rates. BTW, 1k invested for 20 years at 26% becomes 102k, and at 25 years is 323k.

I have also benefited significantly from timing my purchases at low points in the market, and selling near the tops. For someone who spends many hours each day studying the markets, and has done so for more than 30 years, this is not as hard as it sounds.

As for Warren Buffet, he is a much better investor than I am. Making high rates of return is easier on smaller amounts of money. Doing the same with tens of millions per deal is much more difficult. Keeping hundreds of millions invested at better than average returns is far more difficult than doing so with millions.

Australia’s strength is not to sell to China alone. By being the quarry of the world, Oz should cater to as many customers as possible, be it China, Japan or India.

That's what BHP's CEO was saying on CNBC. Very bullish. Alas, I sold way too early.

Whoops, Correction: Warren manages tens and hundreds of Billions - not millions.

At work I am responsible for more than a $billion of assets and I am not able to achieve the same ROE there as I do with my much, much smaller personal assets.

OO Says:
China will NOT become the next superpower within 10 years, I can assure you that. This is a country that I am intimately familiar with, and I can bet all I have against such a possibility.

hmm, must change my analysts... They are already a superpower, just not THE superpower. You don't see the population of 1.x billion, arms buildup, renewed capitalist enterprise, consistent 9% p.a. growth and snaring an increasing share of world commmodity consumption with unique deals in Africa and elsewhere as creating an economic and military superpower? hmm...

Australia’s strength is not to sell to China alone. By being the quarry of the world, Oz should cater to as many customers as possible, be it China, Japan or India.

Any supplier will do their best to sell to whoever's buying at the most favourable price, in a global marketplace (subject to security restrictions in the case of uranium, embargoed countries, etc). Australia doesn't have every kind of resource there is, but right now demand for iron is high from China. More recent industrialising 'Asian tiger' economies these days I suppose include Indonesia, Vietnam, Thailand, etc, along with the more established S. Korea, Japan, etc. India has been relatively slow to industrialise in a big way, even with its English language advantage. I name these as countries in the immediate region, which makes freighting of commodities easier and cheaper...

OO,

I hope that the actual inflation is higher than I am expecting. I would make more money in an environment of greater inflation.

But, I am expecting the effects of globalization to continue to mitigate the inflation pressures, even if it is by a diminishing factor.

Zephyr Says:
In response to your earlier question: Yes, my personal investment returns are without any IPO windfalls or one-time big deals.

With the exception of the windfall of the housing boom? That's how my folks have made their biggest gains...

DS,

if you must enquire, I expect a crash landing of China in 2 years. What you said about China is correct - on surface, I am aware of all that but I also know the stories behind each headline that you've quoted. I am ethnically Chinese, and I still have lots of friends doing businesses there. They basically share the similar view.

I won't go into an elaborate analysis of why we arrive at this conclusion. Let's just keep it at that and check back in 2 years. The next China to take up the void may be Vietnam, which shares the same work ethics, or India, but we will see.

China will close the gap over time. But even if they have no problems along the way, it will be decades before their GDP is comparable to the US. Right now they are about equal to California.

They cannot sustain their recent growth rate forever. If they sustain a 5% faster growth rate it will take them 40 years to catch up with the US.

DS,

I expected the housing booms and busts to occur. I do not consider expected events to be windfalls.

But, clearly my returns do include the “windfalls” and the crashes of several housing booms and busts. The cycle continues, and I continue to ride it.

I must sleep now. I will come back another day.

Yeah, I gueeessss it is possible, especially if you have been buying and selling housing at the right moment. I realized that I have returns greater than that since I really started investing in 1999, mostly due to buying a two unit home in San Francisco at the right lucky time.

euro just broke 1.4

I am waiting for the Loonie to pass the Greenback. It will happen any minute now.

OO, I understand there are differing arguments about China. I don't think it will necessarily throw its weight around in global politics in the same way as the West, for instance, and I don't think it has huge imperial ambitions, although you never know. It has some impressive stats already tho, and the definitions of middle, great and superpowers are really about relative size, output, and military capability. China is spending a lot on modernising its armed forces, for instance, funded by its manufacturing windfall. The rest is open to debate, really, e.g. it is a huge exporter, but is currently only the world's 4th largest economy by GDP according to the World Bank (but 2nd according to the CIA world factbook??). California's GDP considered as a 'country' is placed somewhere between 6th and 10th by various sources, for the record.

Uncle Buck on Life Support:

http://www.stockmania.com/2007_09_20_archive.html

very pithy, kahunabear... i like your style...

Zephyr,

I've noticed that too. It doesn't seem to be any particular feat to take say a 50k account and turn it into a 250k account. But then something happens... and I'm not sure what? Retail a/c over 1 mil. it seems like investors become much less brazen and opt instead for "preservation of capital" style of management? Institutional a/c? Forget it.

I'd be curious to get your take on why that is?

"The dollar is down… And some think this is bad… now our goods will be more competitive overseas, and foreign goods will be less competitive here. So our trade deficit will decline and our employment will rise."

I disagree; this is good only for the foreigners or foreign stocks. Our cost of living will soon be skyrocketing.

Peter Schiff said it best:

http://europac.net/Schiff-CNBC-9-18-07_lg.asp

DS,

In my opinion, a Chinese recession/depression around 2010 is already overdue and healthy (IF managed properly). A visit to the country will reveal vast gulfs of wealth between the very conspicuously rich and the poor. Corruption continues to be endemic. The mainstream culture is wasteful and quite decadent. There are tons of pointless projects that are generating short term GDP growth at the expense of sustainable long term growth.

Politically, China has major challenges ahead and it is not nearly centralized/modernized enough to face it in a very coherent manner. The CCCP core is actually quite enlightened and technocratic, but once you move outside of the booming coastal cities, things still suck.

DinOR,

Perhaps, but it seems an even more common feat to turn a $50,000 account into a $10,000 account...

astrid,

LOL! Yeah, I've seen that a few times. Especially when the words "inheritance" and "ETrade" are mentioned in the same sentence. Typically though a retail broker will get fired long before those kinds of losses are sustained. Believe it or not though this really is a problem.

By the fiduciary nature of most ERISA a/c there's the need for regular liquidity to meet the obligation of serving current retirees. Depending on allocations and the ages of participants this can really paint the finance group into a corner. Older members are all about preserving capital and just carving out conservative returns. Younger board members are saying, hey! What about me!?

I trust everyone is enjoying the "Subprime and Solutions Hearing"?

It doesn’t seem to be any particular feat to take say a 50k account and turn it into a 250k account.

DinOR,

I agree with Astrid. I think what you're seeing is a quirk of statistics. You have enough investors throwing their $50k around that some of them are statistically bound to hit some huge returns. Sort of like those monkeys typing out Shakespeare.

At higher levels of investment you have fewer institutions, and they can't afford to lose 100% of the investment (well, unless they're a Bear Stearns hedge fund) so the nature of risk management being what it is, you don't see as many 1000% returns on $1B as on $50k...

I am waiting for the Loonie to pass the Greenback. It will happen any minute now.

On that day, we will all meet and sing O Canada.

This is an interesting little aside that I just received. Very few of these places are actually in cities.

http://higley1000.com/archives/44